Legislation may or may not protect pensions

Posted: Sep 12, 2006 12:01 AM

When a member of Congress introduces a bill that weighs more than a stack of best-sellers, do the politicians read it?

For one particularly unwieldy slab of legislation, the answer doesn't matter because it's a done deal. Last month, Congress passed the Pension Protection Act of 2006, which supporters called the most sweeping pension reform in 30 years.

One of the chief goals of the bill was to discourage corporations from boxing up their pension obligations and tossing them into the trash. Unfortunately, corporations have proved to be more efficient housecleaners than Heloise. Back in the mid-1980s, corporations sponsored 112,000 pension plans, but by 2004 that number had shriveled to fewer than 30,000. At this point, whether the new law persuades companies to play nice with their employees or backfires is something pundits are furiously debating.

But taking even a cursory look at the legislation - which is probably more than most of the politicians did - indicates that Congress has hedged its bets. The act creates new reporting and funding requirements for companies that continue to maintain pension plans. But at the same time, the sponsors stuffed the bill with all sorts of provisions that they hope will prod workers into saving more of their own cash for retirement. That way, if the life raft sinks, workers will at least be able to cling to their own life preservers.

One practical effect of the law is that savings dynamos can't accuse the government of being obstructionist. Contribution ceilings for retirement accounts still exist, but they are so high - think vaulted ceilings - that most investors will never bang their heads on them.

What the pension act specifically did was extend the graduated saving tables that Congress passed a few years ago. If you're at least 50 years old, for instance, you can stuff a total of $25,000 between an Individual Retirement Account and a 401(k) in 2006. A working couple could theoretically save double that amount. Younger investors who invest through both types of plans could squirrel away $19,000 a year.

The government's generosity hardly stops there. This week and next, I'll share some of the other features of Congress' largesse.

AUTO PILOT SAVINGS - You can make 401(k)s as attractive as possible, but millions of workers still won't devote the 10 minutes it probably will take to enroll. Up against that grim reality, the pension act's authors hope to trick slothful noninvestors into saving. The act gives companies its official blessing to enroll these procrastinators into 401(k) plans without their permission.

Research suggests that automatic enrollment in workplace retirement plans does work. In its new analysis of 401(k) investing, Fidelity Investments examined the habits of 9 million employees in nearly 12,000 workplace retirement plans. At companies that imposed automatic enrollment, the participation rate was 22 percentage points higher than at other companies. The participation rate jumped 40 percentage points among younger and lower-paid workers, who are least likely to save for retirement.

Apparently, people don't mind if Big Brother drags them into a 401(k). In the survey, 87 percent of those automatically enrolled stayed put, even though they were free to ditch the plan. Of course, that would have required them to fill out paperwork.

COLLEGE SAVINGS TAX RELIEF - While so-called 529 college savings plans can be an excellent way to save for college, parents who opened these accounts faced the risk of eventually setting off a ticking tax bomb. What attracts parents to 529 plans is their ability to stuff money into them without worrying about federal taxes.

But that tax advantage came with a caveat. Families could withdraw money for college expenses without triggering federal tax through Dec. 31, 2010. The next day, however, families would have been forced to pay taxes on the profits. Many experts tried to assure parents that Congress would surely not let this tax protection expire, but there was no guarantee. Until now. A single sentence in the 900-plus-page legislation made the tax perk permanent.

If you invest in a 529, stick with the low-cost plans. My favorite 529s are Nevada's Vanguard plan (www.vanguard.com), Utah's Vanguard plan (www.uesp.org) and West Virginia's plan that uses Dimensional Fund Advisors mutual funds (www.smart529.com).

RETIREMENT SAVINGS CONTRIBUTION CREDIT - The legislation also permanently spared the so-called Saver's Credit, which awards lower-income savers a tax break. To encourage these folks to set aside money for retirement, the federal government will refund as much as $1,000 for someone who invests in an IRA or 401(k). To qualify for the obscure credit, which was scheduled to disappear at the end of this year, a single taxpayer's income must be below $25,000 or $50,000 for a married couple.